An account liquidation occurs when the holdings of an account are sold off by the firm in which the account was created. In the majority of cases, this will deal with problems arising with margin requirements. When you sign up for a margin account with a brokerage firm, that firm obtains the legal right to liquidate your account when you are unable to meet the account's requirements.

There are two main account types: cash accounts and margin accounts. A cash account only allows an investor to purchase securities up to the amount of the cash held in the account. For example, if an account has $10,000 in cash, the account holder will only be able to purchase a maximum of $10,000 worth of stock.

With cash accounts, a brokerage firm does not have the same ability to liquidate unless it is in regards to an external factor like a personal bankruptcy. A margin account, on the other hand, allows investors to borrow money from a brokerage firm on top of the money they have placed in the account, usually up to 50%. Therefore, if you have $5,000 in the account, you could potentially purchase $10,000 in securities.

A typical requirement of a margin account is to maintain at least 25% equity, or your own money, of the total market value at any given point. For example, suppose you purchase $10,000 worth of stock with $5,000 of your own money and $5,000 of margin money. If the value of this position were to fall to $7,500, your equity position in the investment falls to $2,500 ($7,500-$5,000), which represents 33% margin - above the 25% requirement.

However, if the value falls to $6,500, your equity in the position would be reduced to $1,500 ($6,500-$5,000), which puts your margin at 23%, falling below the minimum margin requirement of 25%. If the account does fall below the minimum maintenance margin level, you will either have to add more money to the account to meet the margin call or your account will be liquidated in part or in full.

For more information, read the Margin Trading tutorial.

  1. Can mutual funds use leverage?

    Traditionally, mutual funds have not been considered leveraged financial products. However, a number of new products have ... Read Full Answer >>
  2. How do hedge funds use leverage?

    Hedge funds use several forms of leverage to chase large returns. They purchase securities on margin, meaning they leverage ... Read Full Answer >>
  3. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  4. How do hedge funds use equity options?

    With the growth in the size and number of hedge funds over the past decade, the interest in how these funds go about generating ... Read Full Answer >>
  5. What does a futures contract cost?

    The value of a futures contract is derived from the cash value of the underlying asset. While a futures contract may have ... Read Full Answer >>
  6. How does a broker decide which customers are eligible to open a margin account?

    Brokers have the sole discretion to determine which customers may open margin accounts with them, although there are regulations ... Read Full Answer >>
Related Articles
  1. Stock Analysis

    Starbucks' 6 Key Financial Ratios

    Discover the key financial ratios that are important when analyzing the financial health, profitability and efficiency of Starbucks' operations.
  2. Options & Futures

    Ultra ETFs Are Not Your Father's ETFs

    Ultra ETFs can add huge returns to your portfolio, but there's a lot of risk and volatility involved with these leveraged ETFs.
  3. Trading Strategies

    Margin Investing Gets A Bad Rap, But For The Thrill-Seeker, It's Worth It

    Investing on margin can be profitable but it's a risky play that needs care.
  4. Credit & Loans

    Explaining Leveraged Loans

    Leveraged loans are loans extended to companies or people who already have large amounts of debt.
  5. Stock Analysis

    The Biggest Risks of Investing in Boeing Stock

    Learn about the biggest risks faced by Boeing investors. How should investors think about cyclicality, debt, sales volumes and customer concentration?
  6. Stock Analysis

    Is the Stock Market Crashing? 5 Signs to Consider

    Learn about some signs of a potential stock market crash including a high level of margin debt, lots of IPOs, M&A activity and technical factors.
  7. Stock Analysis

    Coca-Cola Vs. PepsiCo: Which Stock Should You Buy?

    Learn about the bull case for Coca-Cola and PepsiCo. Find out which is more attractive for investors, and learn about the strengths of each company.
  8. Investing Basics

    What Happens in a Haircut?

    One meaning of haircut is the difference between prices at which a market maker can buy and sell a security.
  9. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily Financial Bull 3X

    Obtain a thorough review and analysis of the Direxion Daily Financial Bull 3X fund, a leveraged ETF that tracks the performance of the financial sector.
  10. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  2. Equity

    Equity is the value of an asset less the value of all liabilities ...
  3. Debt/Equity Ratio

    Debt/Equity Ratio is debt ratio used to measure a company's financial ...
  4. Marginable

    Definition of "marginable."
  5. Borrowing Power Of Securities

    The value associated with being able to invest in securities ...
  6. Open Trade Equity (OTE)

    Open trade equity (OTE) is the equity in an open futures contract.

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center